How Apple may be failing – and taking its suppliers with them

December 3, 2018

The first ever company to hit $1 trillion market value in the United States in August 2018, the giant worldwide technology-based operator Apple, may now be going through rough times. Last figures showed that since August, Apple’s market value has declined by nearly $300 billion, reaching a market cap of $817.7 billion. In fact, for the first time in eight years, Microsoft has equalled Apple’s market value, with $816.3 billion. So, what is really happening to the formerly most valuable publicly traded company? And what might be the consequences for all those companies that are involved in its supply chain?

 

First, let’s highlight the key facts that might be damaging Apple’s shares, which are now trading below $180, a fall of about 20% since early October. The main reason behind Apple’s falling figures is the decrease in sales of the company’s cash cow product, the iPhone, which accounts for around two-thirds of the total revenue. Since Apple revealed their new line of iPhones, consisting of iPhone XS, iPhone XS Max and iPhone XR, the corresponding sales have been relatively flat, with a predicted year-on-year revenue in the range of 0% to 5% for the holiday season. Also, emerging markets like Brazil, China and India have displayed the same low demand for Apple’s products, mostly due to currency fluctuations. These numbers have translated in investors’ disappointment and induced uncertainty whereas to continue to invest in such a saturated market as it is the smartphone one. Despite the fall in sales, Apple still has managed to successfully rise its revenues, and thus, profits, by charging higher prices for the iPhone. This implemented strategy to remain profitable despite the lower iPhone demand, although proving effective at the time, cannot be a sustainable long-term approach adopted by the company. Another business strategy employed by the CEO of Apple, Tim Cook, to prevent adverse consequences of falling sales is to focus on the services business of the company – apps such as Apple Pay, Apple Music, iCloud and so on. By growing their subscriptions model, Apple can benefit from recurring revenue and consequently, higher valuation. However, investors are still not very confident about this tactic, as Apple has not concretely stated its plans on how to launch its streaming video app and defeat strong players such as Netflix and Amazon Prime Video. Lastly, Apple reflects broader international concerns, such as the US and China ongoing trade war, as we could imagine by reading “Designed by Apple in California, Assembled in China” at the back of our own iPhones.

 

We have seen how Apple has been struggling with its revenue driver product, the iPhone, and which strategies have been put into practice to cope with the adverse external environment. But what can be the consequences to its suppliers and how can they create a strategy to survive?

 

For instance, the main assembler of iPhones, Foxconn Technology Group, has already pronounced their intentions of cutting their internal expenses by 6 billion yuan in 2019 and dismiss 10% out of their non-technical staff. These drastic measures arose due “a very difficult and competitive year” faced in 2018. In effect, many suppliers rely heavily on volume demand and when this decrease, there is hardly no other solution left for supplier companies to implement, other than cutting superficial costs. Another example is Lumentum, the company which provides the face sensors to the latest iPhones, which suffered a drop of 30% on shares.

 

While it is still early to say if the giant Apple is really falling to a place where it might not be able to recover financially, the truth is that the demand for newer iPhones has been decreasing over the last years. Although Apple has a higher range of strategies to cope with lower sales, its supply chain companies are, undoubtedly, the most affected parties.

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